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NGP Capital Resources (NASDAQ:NGPC)

Q3 2012 Earnings Call

November 06, 2012 11:00 am ET

Executives

Stephen K. Gardner - Chief Executive Officer and President

L. Scott Biar - Chief Financial Officer, Chief Accounting Officer, Chief Compliance Officer, Treasurer and Secretary

Analysts

Troy L. Ward - Stifel, Nicolaus & Co., Inc., Research Division

Robert J. Dodd - Raymond James & Associates, Inc., Research Division

Operator

Ladies and gentlemen, welcome to your NGP Capital Resources Company's Third Quarter 2012 Earnings Call. [Operator Instructions] As a reminder, this conversation is being recorded. Now, I would like to turn the call over to your host, NGPC President and CEO, Steve Gardner.

Stephen K. Gardner

Thanks John, and thanks to all of you for joining us on today's election day. I'm confident we will be the lesser of the news that will come across your screen today.

With me today is Scott Biar, our Chief Financial Officer. I'll make some opening remarks, after which, Scott will provide details regarding the financial results for the quarter, then we'll talk about our portfolio activity and prospects for new investment prior to opening up the phone for questions.

I want to remind everyone that our remarks today may include comments which could be considered forward-looking statements, and such statements are subject to many factors that can cause actual results to differ materially from our expectations, as expressed in those forward-looking statements. These factors are described in more detail in our SEC filings, and I'll refer you to our website or to the SEC's website to review these filings. We undertake no obligation to publicly update or revise any forward-looking statements, which speak only as of today's date.

For the third quarter of this year, we reported total investment income of $6.3 million and net investment income of $3.4 million or $0.16 per share. Our net asset value per share reached its highest level since March of 2011, increasing to $9.70 per share. And during the third quarter, we funded $75 million of new investments representing our second highest quarterly volume of new investment activity since our inception 8 years ago.

In early October, we entered into a new $6 million investment in Midstates Petroleum, 10.75% senior unsecured notes bringing our total year-to-date new investment activity to over $117 million, $63 million of net -- $63 million net of redemptions and repayments. We also completed 2 significant restructurings within our portfolio in the Black Pool and GMX Resources, which together, accounted for an increase in fair value of $8.7 million or $0.41 per share. Our current investment portfolio is valued at approximately $219 million. We'll have more details on our portfolio of prospects further on the call.

Primarily as a result of significant nonpublic information involving the Black Pool restructuring and ATP's bankruptcy filing during August, we were restricted from repurchasing any shares of our common stock during the third quarter. However, we have -- we do have authorization under the stock repurchase plan to buy an additional $8.4 million of our common stock subject to the applicable Securities laws and regulations, restrictions on the method, timing, price and volume of stock repurchases.

Now, I'll turn to Scott -- I'll turn the call over to Scott Biar, our CFO, to review the quarterly performance.

L. Scott Biar

Thanks Steve. For the quarter ended September 30, 2012, total investment income was $6.3 million or $0.30 per share, compared to $5.3 million or $0.25 per share in the second quarter of 2012 and $7.3 million or $0.34 per share in the third quarter of 2011. The sequential improvement is primarily attributable to an increase in the size of our investment portfolio as we continue to make new investments. The year-over-year decline is attributable to $2 million of investment income in the third quarter of 2011 from our investment in Alden Resources, including the recognition of $1.1 million of previously unamortized original issued discount on our loans Alden, which we sold in July of 2011.

Operating expenses for the third quarter of 2012 totaled $2.9 million, increasing only $200,000 compared to the second quarter of 2012, despite the higher income level and decreasing $100,000 or 3%, compared to the third quarter of 2011. The sequential increase was attributable to the higher interest costs on higher debt balances supporting our investment portfolio and higher management fees to our investment advisor as a result of higher total asset balances. Other general and administrative costs decreased sequentially by $100,000 or 8% as a result of lower professional fees.

Our net investment income for the third quarter totaled $3.4 million or $0.16 per share, compared to $2.6 million or $0.12 per share in the second quarter of 2012, and $4.3 million or $0.20 per share in the third quarter of 2011. We had net realized gains of $1.7 million or $0.08 per share in the third quarter of 2012, primarily resulting from our sale in August of $15 million face amount of EP Energy senior unsecured notes at an 8.5% premium.

In addition, Anadarko paid us $400,000 to buy us out of the remainder of the 36-month tail net profits interest that commenced when the primary net profits interest was repaid in February of this year. Both of these transactions represent very successful exits for us. And in essence, we exchanged the $0.01 of additional investment income this quarter for the $0.08 capital gain and $15 million return of capital.

In the third quarter of 2011, we had realized losses totaling $30.9 million or $1.43 per share recognized upon the exits of Alden, TierraMar and DeanLake, most of which was offset by the reversals of unrealized losses recorded in prior periods on those investments.

Net unrealized gains in the third quarter of 2012 totaled $7.1 million or $0.33 per share. That primarily reflected the increased valuations of our investments in Black Pool and GMX Resources as a result of the Black Pool restructuring and the GMX exchange offer that Steve touched on earlier. So our net increase in net assets resulting from operations during the third quarter of 2012 was $12.2 million or $0.57 per share, our highest quarterly increase in 3 years. And we declared dividends of $0.16 per share, bringing our net asset value as of September 30, 2012, to $9.70 per share, a 4.4% increase for the quarter and a 4.8% increase from our beginning-of-the-year net asset value of $9.26 per share.

At September 30, we had cash and cash equivalents totaling $31.9 million. We had $37.5 million outstanding and $34.4 million available for borrowing under our investment facility. Our long-term debt-to-capitalization ratio at the end of September was 15%, and our net debt-to-capitalization ratio was less than 3%.

In October, after funding our $6 million investment in Midstates Petroleum, we repaid $18 million of the amount outstanding under the investment facility, and we currently have $19.5 million of debt outstanding under the investment facility at approximately $52 million available for borrowing.

And now, I'll turn the call back over to Steve.

Stephen K. Gardner

Thanks Scott. On October 1, we funded a $6 million participation in the Midstates Petroleum, $600 million private placement of 10.75% senior unsecured notes due 2020. Like several recent oil and gas acquisition-related high-yield offerings, the issuance was oversubscribed, and we were not able to get quite as much as we would like. Proceeds from this offering were used to finance Midstates' acquisition of the oil and gas properties of Eagle Energy Production, LLC.

Back in July, we advanced an additional $25 million to ATP Oil & Gas Company, under our limited term overriding royalty interest in certain producing oil and gas properties operated by ATP in the Gulf of Mexico, which brought our net balance outstanding under this arrangement to $43 million at that time.

As consideration for the new investment with ATP, we obtained a 5% limited term overriding royalty interest in ATP's Telemark properties to supplement the existing 10.8% overriding royalty interest in the Gomez field properties.

As we've discussed previously, the investment is structured as a real property interest in the underlying Gomez and Telemark properties that are operated by ATP. The payments received under this royalty arrangement are first applied to our annual return of 13.2%, with any excess applied to return of capital. The limited term overriding royalty interest expires after we received all of our invested capital back with our associated return.

As most of you know, on August 17, ATP filed for protection under Chapter 11 of the U.S. Bankruptcy Code and is currently working on planned reorganization. The judge presiding over the case signed an order, allowing ATP to pay amounts received after August 17, to parties that believe are entitled to receive them, including royalty holders such as ourselves. Provided that we agree to repay ATP any amounts that the court later determines to have been and appropriately play. We have received our payments from ATP in September and October, and the net investment balance currently outstanding is approximately $41 million.

Also in July, we acquired $50 million of redeemable Preferred Units in Castex Energy 2005, L.P. , which is a private oil and gas limited partnership engaged in the acquisition, exploration and development of oil and natural gas properties, in south Louisiana and the shallow waters of the Gulf of Mexico. The Preferred Units are in 8% cumulative cash dividends payable quarterly. Upon redemption, holders of the Preferred Units have the option to elect to receive the outstanding face amount plus either a cash payment resulting in a 12% internal rate of return inclusive of the dividends, or a limited partnership interest of which our share would be 2/3 of 1%. The Preferred Units are callable by Castex 2005 at any time after 1 year, subject to the same redemption rights. And each holder of the Preferred Units has the right to put its Preferred Units to Castex '05 under the same redemption terms on or after the earlier July 16 -- I'm sorry, July 1, 2016, or a change of control for liquidation of the partnership.

The way that investment is structured, we recorded dividend income at 8% or roughly $1 million during the third quarter and recorded an unrealized gain of $1.1 million to reflect the fair value of the investment, including the redemption feature.

In September this year, we tendered our $12.7 million face amount of GMX Resources 5% convertible notes to 2013, in connection with GMX's exchange offer, and received an exchange an equal amount of 9% senior secured second-priority notes due March of 2018 and approximately 3.6 million shares of GMX common stock.

We sold 300,000 shares of GMX common stock in September and an additional 240,000 shares in October. In September, we finalized a restructuring of our senior secured term loan with Black Pool Energy Partners effective July 31. Huff Energy Holdings, a newly formed private oil and gas company, merged with Black Pool and became the new borrower under our term loan. We retained our first liens on the original Black Pool properties and were granted the first lien on additional Huff-producing properties, significantly enhancing the cash flows and asset coverage under the loan.

In exchange for the increased collateral, we reduced the interest rate under the term load to -- term loan to an annual rate of 11% and extended the maturity to April 15 of next year. The Black Pool-Huff investment is an interesting story, and while it's still not over, it does demonstrate an example of how patients are working together with good management in our portfolio company through some difficult challenges can ultimately result in a mutually desirable outcome.

The Black Pool loan was originated in October of 2008 to finance the drilling program that did not go as well as planned. Producing wells encountered issues on and off almost since their inception. The loan matured in October of last year, but rather than foreclose and farm out our fire sale the properties, we chose to work with management of Black Pool and Huff until this consolidation of Huff properties could be completed, resulting in a much broader asset package to support our loan. Huff is currently seeking senior financing in other financing sources and may reduce our loan or place it entirely between now and its maturity next spring.

As you're aware, we rate all of our investments from 1 to 7, with 1 being the highest credit quality. At the end of the third quarter, our average portfolio rating on a dollar-weighted fair market value basis was 3.9, as compared to 4.5, as of June 30 of this year. This improvement in credit quality reflects, among other things, the improved ratings for Huff, GMX and ATP. Of the 19 rated investments we held as of September 30, 2012, compared to December 31, 2011, 8 investments retained the same rating, 4 investments declined in rating, 4 improved and 3 were added during the first 9 months of 2012. No investments have been placed on nonaccrual during this calendar year.

Deal flow in the energy space has been fairly steady though the fall has been somewhat quieter than we had originally anticipated, not unlike the general middle market. At present, we're working on a number of smaller E&P development deals and energy service opportunities that look interesting, though as ever, the timing and likelihood of closings is hard to project at this point.

Additionally, we are working on a current -- on a number of potential middle market investments that look promising. Through October, we've recorded $117 million of new investments of this year, and we hope to see some middle market originations within the next quarter or 2.

Overall, I'm quite pleased with the quarterly results. Our investment income is increasing, our investment portfolio is growing, our net asset value is at its highest level in 6 quarter, and our portfolio of credit quality is improving. We've increased our dividend from $0.13 per share to $0.16 per share this quarter, and through 9 months, we have declared dividends totaling $0.41 per share.

Now, I'll turn the call back to our operator, John, and he will arrange to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Troy Ward from Stifel.

Troy L. Ward - Stifel, Nicolaus & Co., Inc., Research Division

Just real quick, on ATP, you made the investment in July and in the text, it said you started paying in September. Did that September payment include any back pay for July and August? How should we think about that income from that over a full quarter basis?

Stephen K. Gardner

It won't affect the income much, if any. There are some default rate charges that add to the return. But the way that the investment is structured, Troy, while the payments weren't made in July and August, the entire structure is based on our total return being received over time plus our capital. So effectively, it pushes it out. We actually earned the return in those quarters. And so when we received the September payment, a much larger share than normal was ascribed or attributed to the return, and a smaller amount was to return of capital. Does that make sense?

Troy L. Ward - Stifel, Nicolaus & Co., Inc., Research Division

So in this -- in the third quarter, you basically had a full run rate hit in the income statement.

Stephen K. Gardner

That's correct.

Troy L. Ward - Stifel, Nicolaus & Co., Inc., Research Division

Okay, so we would expect the same run rate in the fourth quarter?

Stephen K. Gardner

That's correct, Troy.

Troy L. Ward - Stifel, Nicolaus & Co., Inc., Research Division

It would just be a different categorization.

Stephen K. Gardner

That's right.

Troy L. Ward - Stifel, Nicolaus & Co., Inc., Research Division

All right. And then on the Black Pool, a little background on the investors here. Is Huff -- is this a new entity, new players, or is it kind of the same investors that basically put up new collateral that they had control of?

Stephen K. Gardner

Huff is a private equity group out of the New York area that was the original equity provider and investor in the Black Pool Company. And what they've done is taken several other energy-related companies that were separate from Black Pool and combined them with Black Pool. So it's the same original equity provider that's just pulled it all together.

Troy L. Ward - Stifel, Nicolaus & Co., Inc., Research Division

But you now have access to additional collateral?

Stephen K. Gardner

That's correct.

Troy L. Ward - Stifel, Nicolaus & Co., Inc., Research Division

And then real quick, just -- you didn't mention it, can you just provide us any color on whether the, I guess, what they call Super Storm Sandy had any impact on your portfolio?

Stephen K. Gardner

It had 0 impact on our portfolio. We don't finance a lot of oil and gas off the coast of New Jersey. I don't mean to be flippant, that's a tough situation. But for once, the hurricane didn't hit us.

Troy L. Ward - Stifel, Nicolaus & Co., Inc., Research Division

I understand. And then one last one, and I'll get back in the queue maybe. You did have a pretty big departure with Kelly, he has been a long-term executive there, really good guy. How does his departure impact you guys long-term, I mean, even on a day-to-day basis?

Stephen K. Gardner

Well, it is a significant departure. And personally, on a day-to-day, I was close to Kelly and still I am. He's a fine man. What we've done, with the promotions of Hans Hubbard and Chris Ryals, who've been with us -- actually Hans longer than Kelly, and Chris, around as long as Kelly was -- to a Managing Director level, we feel like we are able to offer more opportunity for our existing staff. Near term, other than the handoff of some leads off some deals, it's really not had that much of an impact. We fully expect that the team that we have here in place can handle all of what we have coming our way plus some. So we'll miss him, but we're going to be fine.

Troy L. Ward - Stifel, Nicolaus & Co., Inc., Research Division

Did you -- are you adding anybody at the lower levels?

Stephen K. Gardner

Separately, we -- early or mid October, we added a new financial analyst, and we'll continue to add at the lower levels as our guys season and step up to the plate.

Operator

And we'll take our next question from Robert Dodd from Raymond James.

Robert J. Dodd - Raymond James & Associates, Inc., Research Division

Just 2 main questions. On the originations year-to-date, $117 million, obviously, a very strong Q3 number. Just from your tone, working on some smaller deals, going forward and then middle market stuff, I mean, do you still feel comfortable with $150 million in oil and gas gross originations for the year?

Stephen K. Gardner

We feel comfortable. We're here -- we're in November, and the holiday period's always a tough time to close. What we have on our plate today, it's certainly possible we could reach $150 million. It's also possible that we won't quite get there, but what we have currently could get us awfully close to that number. So I'd say we're ballparking in a pretty good shape and things that we have out here get us to the finish line.

Robert J. Dodd - Raymond James & Associates, Inc., Research Division

Okay, I appreciate that. And then just certainly one on ATP, obviously, it's a little bit of -- I don't want to call it, vulnerability to -- depending on what the judge decides to do in future about whether you have to repay or not. Are there any, that you could talk about, hurdle rates? Targets? Any kind of information you can give us about? Is there anything in particular the judge has spelled out to all the participants, not just you, obviously, about what he's going to base that decision off?

Stephen K. Gardner

Well, there are a myriad of issues. There are all sorts of creditors lined up and then there are property interest owners like ourselves that also have issues and that's going to play out over the coming months. In the meantime, we'll get paid as agreed, but there will be hearings and trials on various and sundry issues that may well impact us. So yes, it's -- there's still some, what I would call, litigation risk to the structure, but the way our overriding royalty interest is structured is consistent with decades of oil and gas law and decades of treatment of the bankruptcy course. So from our perspective, absent making new law out of whole cloth, then we should be in good shape. There are a number of royalty interest owners including ourselves, who have filed motions for declared to judgment which was set in stone our treatment. Those will play out over probably well into spring of next year. In the meantime, we like the position we're in, which is where we intended to be from the get-go.

Operator

[Operator Instructions] And we'll take another question from Troy Ward from Stifel.

Troy L. Ward - Stifel, Nicolaus & Co., Inc., Research Division

Following up on Robert's question on ATP. Just to reiterate, you made this investment, I think in July, and it declared Chapter 11 in August. Has anything changed? I mean, you entered this, obviously, with eyes wide open, kind of where they were headed. Has anything changed from your original assessment since you made the investment?

Stephen K. Gardner

It's only improved. Because we have confirmation from the court at the first round of hearings that the structure holds up and as we expected. So nothing has changed in a negative way, I would say, with the confirmation. We feel better about where we are, but it actually played out as intended. And it's -- you're correct, Troy, we did come in with our eyes wide open there. It's our -- actually, the add on was our fourth investment with ATP, and the original one for this was back in, I guess, it was in June of 2011 and this was an add-on. Adding the telemark properties to our overriding royalty interest actually spreads the risk. One of the things that, I guess -- that's a fair point, Scott, let's me know that in the better position financing approval, there is provision for the development -- the drilling of an additional development well on the Gomez properties. We had never counted on that being drilled even though we expected it would be, it was not part of our economics. They now have the funding and expect to go ahead with that development well, and if successful, it's just going to improve the collateral position, and it will actually pay us back more quickly. So frankly, I hope they take their time drilling it so...

Troy L. Ward - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then following up on some information you gave previously about, looking in to the middle market a little bit more. Can you give us an update on where you're looking at the middle market, financings, and then that kind of traction you're getting in that vertical?

Stephen K. Gardner

You bet. Where we have focused so far, we've looked at an awful lot of deals, well over, I'd say at this point, in the few months that we've been involved here, we've looked at about 20 deals that actually made the screening. We've actually issued 4 term sheets. One in business services, one in healthcare, one in niche manufacturing and one in value-added distribution. One of the things that I want to point out here is in the middle market industry in general, there's a risk you're aware Troy, that's showing some concern, that people have started stretching credit stats to be able to reach for yield. I think the fact that we issued just 4 term sheets, shows that we've taken a pretty narrow view of this and credit quality is of essential import to us and that we don't intend to change the yield. We have, we're in the final running for one particular investment that we hope to hear from soon. It's a competitive deal, just like the ORRI, can go either, any which way. But we feel good about our effort. It's expanded in to, included all of our staff, the energy guys as well, and so we feel good about how we've integrated it. It's just going to be -- in some ways, ways it's a numbers game, but we're not going to reach.

Troy L. Ward - Stifel, Nicolaus & Co., Inc., Research Division

And is each of those 4 there where you have issued the term sheet are each, are those all for sponsored transactions, private equity sponsored?

Stephen K. Gardner

They are, in fact.

Troy L. Ward - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And kind of when we talk about, I mean, I know it changes a little bit from what industry you're looking at and deal-specific, but kind of where do you view the correct kind of leverage points in today's market?

Stephen K. Gardner

Look, it's probably the top end. If you're looking at debt-to-EBITDA, cash flow, 3.5x will be the high end for us. Actually, we've looked at some that are lower than that. We've passed -- we've also stretched it a bit, looking at 4 times. But you won't see us north of 4.

Troy L. Ward - Stifel, Nicolaus & Co., Inc., Research Division

So what -- that's a little bit lower leverage and we're definitely glad to hear that one. What size of deals are we probably talking about here from an EBITDA perspective?

Stephen K. Gardner

From EBITDA? Anywhere from $5 million to about $10 million. The top-sized investment deals, depending upon structure, we've looked at probably $8 million is the low end. $8 million and then up to probably $15 million. We probably won't get much bigger than that, particularly given our diversification issues.

Robert J. Dodd - Raymond James & Associates, Inc., Research Division

Okay. And then one last one on the stock repurchase. It sounded like the window was closed because of inside information with the restructurings in the third quarter. Have you purchased any -- in the fourth quarter, was a windows just now opened because you're with the call today, and how, just basically, how do you view the current price with regard to your appetite for repurchasing stock?

Stephen K. Gardner

With our release today, according to our rules, the window should open 2 days from now. We're interested at this level. We still think it's going to weak. We happen to believe in our net asset value, and we think it's a good buy. It's a question of allocation of capital resources. So it will be a day-to-day question as we look at the market going forward. Not sure if the election will have any impact on the market, what that will do to our stock, but we'll be watching.

Operator

[Operator Instructions] So appears that our Q&A session has ended, so I will turn it over to your host for any concluding remarks.

Stephen K. Gardner

Thanks for your time, I know it's a busy day. Let's hope our democracy works, and I'm confident that it will, however things turn out. I appreciate you listening in, folks.

Operator

Okay. Ladies and gentlemen, this does conclude your conference. You may now disconnect, and have a great day.

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